It's no secret that the oil and gas exploration business has become tougher over the past several years, as the world's reserves of so-called "easy oil" have been largely depleted or are zealously guarded by foreign governments.
This has forced global energy exploration and production companies to venture into harsh, uncharted environments -- such as deepwater prospects offshore Brazil and Africa or the Alaskan Arctic -- in search of oil and gas. While some ventures have been duds, others have been wildly successful.
One company in particular stands out for delivering far more successes than failures, boasting an industry-leading exploration success record last year -- Norway's Statoil (NYSE:EQNR), a state-owned oil major that spent decades honing its exploration skills in the Norwegian Continental Shelf.
Statoil's record exploration success in 2013
Last year, Statoil was the world's leading oil and gas explorer, as measured by the total volume of conventional oil and gas discovered, led by its Bay du Nord discovery offshore Canada -- the largest oil discovery of 2013.
An exploration well drilled in Bay du Nord last year by Statoil and co-venturer Husky Energy suggests the discovery could contain between 300 million and 600 million barrels of recoverable oil resources. It is Statoil's third major find in the Flemish Pass Basin, following the Mizzen discovery -- estimated to contain 100 million-200 million barrels of recoverable oil -- and the Harpoon discovery, which is still being evaluated to assess its resource potential.
Statoil in November also announced a major oil discovery in the Norwegian Sea's Snilehorn prospect, which is estimated to contain recoverable resources of 55 million-100 million barrels of oil equivalent and marked the company's third major discovery in the Norwegian Sea in just three months. Combined, the three discoveries contain estimated recoverable resources of 86 million-166 million barrels of oil equivalent.
Big boost to reserves
As a result of its industry-leading exploration efforts, Statoil added nine new fields last year, boosting its proved reserves by about 900 million barrels of oil equivalent. This allowed the company to deliver a reserve replacement ratio, or RRR, of 147% -- the company's highest since it began reporting reserves in 1999 -- and an all-in RRR of 128%.
That brings Statoil's three-year reserve replacement ratio to 119%, the second highest among peers that have reported their reserve replacement ratios for 2013. Only Chevron (NYSE:CVX), with a 123% three-year average RRR, managed to best Statoil on the basis of this metric. Peer ExxonMobil (NYSE:XOM) hasn't reported its ratio for 2013 yet, but its 2012 RRR came in at 115%.
Meanwhile, BP (NYSE:BP) reported a surprisingly strong RRR of 129% for 2013, fueled largely by reshuffling its Russian assets and a major discovery in the Gulf of Mexico, though its three-year RRR is significantly less than Statoil's. Shell (NYSE:RDS-A) similarly reported a very healthy 2013 RRR of 131%, but its three-year average ratio is only 91%, also well below Statoil's.
Defined as the change in proved reserves divided by the produced volume over a period of time, usually one year, the reserve replacement ratio is a crucial gauge of energy companies' ability to replace what they produce with new reserves. A ratio higher than 100% is generally viewed as healthy, while a ratio below 100% can signal trouble.
What's next for Statoil?
With a highly competitive resource base of 22 billion barrels, the outlook for Statoil is strong. The company is now targeting 3% annual production growth through 2016, while simultaneously reducing capital spending by about $5 billion over the period.
Major project start-ups this year, including Gudrun, Valemon, Vilje South in the Norwegian Continental Shelf, CLOV in Angola, Jack/St. Malo and Big Foot in the Gulf of Mexico, and Goliat in the Barents Sea, should help it achieve that goal, while exploratory prospects offshore Brazil, Angola, and Tanzania offer additional upside.
All told, I see reasonable upside for shares of Statoil, which trades at a heavy discount to peers on the basis of metrics such as price to earnings and enterprise value to EBITDA. Along with a more visible runway for production growth over the next several years, the company's new emphasis on capital efficiency and its proposal to implement a quarterly dividend should help boost its valuation.